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Financing Your Business

The 5 Cs of Borrowing Money

Last Updated on February 28, 2019

Allison is a small business finance and lending columnist with Fundera. She's a writer specializing in finance, and her work has appeared in publications including Forbes, TheStreet.com, Travel + Leisure, MSN Money, Yahoo Finance, The Huffington Post, Fox Business and more.

There are some fundamental principles that all respected small business owners cherish: be responsible with your money, treat your employees right and cultivate your customers. Beyond creating a corporate culture that will keep your employees happy and a stellar product that will keep your customers coming back, additional concerns come into play once you accept, or think about accepting, a small business loan.

Insiders in the lending industry refer to the “Five Cs” when deciding whether someone is creditworthy, and the Five Cs aren’t just helpful for loan officers deciding your fate. They’re also a blueprint for you to think about setting yourself up for borrowing success. Even if you pursue alternative options rather than a traditional bank loan, paying attention to the Five C’s can help you structure your company in a way that minimizes the risk of default, and helps maximize your borrowing profile for the future.

1. Capital

The first C comes down to what you’re worth, says Mitchell Weiss, loan expert and author of “Business Happens”. Capital comes down to the difference between your assets—what you own—and your liabilities, which is the sum of what you owe. This is the business equivalent of your net worth.

Room for improvement: This metric is an equation with two parts, assets and liabilities. If your capital isn’t quite where you’d like it to be, focus on increasing your assets, paying off your liabilities or both. Your business should be robust enough that you don’t have to pinch every last penny in order to scrape by, and neither should you need to dip into your savings to fuel prodigious spending or borrowing.

2. Capacity

This is a question for you to ask yourself, Weiss says: “Do I have enough to pay for a new loan?” The way lenders assess this is by looking at your debt load, or all of your monthly obligations divided by your income in the same time period. This is different from capital, because it isn’t about preexisting ownership; it’s about your ability to keep earning money and paying off your debts.

Room for improvement: Aim to keep your debt load below 30 percent. Not only is this a magic number for many lenders, but it’s a good way to make sure you aren’t borrowing more than you can bring in. If you’re approaching that threshold, assess your opportunities for raising revenues and think twice before taking on any additional debt.

3. Collateral

“If you’re financing a large and specific purchase, that should make you more attractive [to prospective lenders] because they have the ability to repossess that item if you don’t pay the loan,” says Weiss. Lenders aren’t aiming to make your life miserable, but if you have collateral on a loan, it reduces their risk and makes them more likely to hand you the cash you need.

Room for improvement: There are ways to obtain funding even if you don’t have collateral like real estate or business equipment. Many alternative lenders have more flexible requirements, allowing you to grow your business now and accumulate more possessions over time that can serve as collateral in the future.

4. Conditions

This C refers to the situation facing your particular business, Weiss says. “These are the opportunities for your business, the uniqueness of your business, its staying power within this and other types of economies.” If disaster struck or the market went south, how well would your company weather the storm?

Room for improvement: Think about the “special sauce” that makes your business thrive. Whether or not you’re pursuing funding options, it’s a good exercise to think through what makes your value proposition special, how you’ll retain customers over time, and your plan of action in case of a bumpy road.

5. Character

“Character has to do with how you’ve conducted yourself in the past both personally and professionally. In most small business loans, a personal guarantee is required,” Weiss says. “They’ll take your Social Security number, date of birth and address, and get a credit bureau report to see how you’ve conducted yourself in the past.” This analysis goes beyond your specific credit score, which is just a snapshot of the current moment in time; it’s about understanding the tale of your past and present, to guess at your future.

Room for improvement: Although there isn’t much you can do about your past, you can start building a good track record now. Make sure you’re up to date on all your loans and obligations, and never miss paying a minimum. Even if you’ve made mistakes in the past, remember that time is your ally; the longer you can show that you’ve managed credit responsibly, the stronger your credit report will become.
Whether or not you’re currently evaluating borrowing money, the Five C’s can help you ensure that you’ll be in a good financial position to take on any future obligations, and that your company’s prospects will keep shining bright.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those
of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Allison is a small business finance and lending columnist with Fundera. She's a writer specializing in finance, and her work has appeared in publications including Forbes, TheStreet.com, Travel + Leisure, MSN Money, Yahoo Finance, The Huffington Post, Fox Business and more.